Commercial Real Estate Terms & Definitions
Below are some of the most common commercial real estate definitions and terms. If you have any questions feel free to contact us.
Acre– A total land area of 43,560 sq. ft.
Acre– A total land area of 43,560 sq. ft.
Add-On Factor – This is referred to as a Loss Factor or a Load Factor. It refers to a pro-rata share that the tenant has with the common areas of the property, including restrooms and lobbies. This is reflected as a percentage and can be applicable the physical area that can help to determine that rentable area that a tenants must pay for. For e.g., if there is 5,000 usable sq. ft. with a 10% add-on factor, the rentable sq. ft. of the tenant will be 5,500.
Anchor Tenant – This usually applies to retail and office spaces. In general, it doesn’t make any sense for a landlord to turn on the electricity in any building if no anchor tenants have been secured yet (a tenant renting more than 10,000 sq. ft.). This can be seen as a large retailer or shopping giant that will attract a lot of customers to a shopping center.
Assignment – This refers to the ability to transfer an entire space along with all the obligations of a particular lease agreement to another entity, which can be an individual or a business. If you have a company that might be bought out, it is crucial that you prepare this in advance.
Attorment – This is a provision in the lease that the tenant agrees to, and accepts responsibility to pay the rent as well as any other required payments to the new propertyowner or landlord of a building or property.
Base Year – Landlords will estimate a specific portion of their lease rate that is in fact operating expenses. The tenants is then given this amount for a year, which takes effect when the lease is signed. Any expenses that go beyond this amount, will be payable directly by the tenant. These amounts are based on a pro-rata basis for every tenant in the building.
BOMA – This refers to the Building Owners and Managers Association. Their responsibility is amongst others, to establish various methods of determining sq. ft. in commercial buildings.
Build-Out – This is the interior are of construction in a specific tenant’s rented space. This includes new construction areas or rebuilding of existing areas.
Build-to-Suite – This refers to a customizable design of a space, and this area is then sold to a tenant.
Building Standard – A list of materials and finishes typically used by the Landlord in all of their build-outs, repairs or restorations of their tenant's suites.
Certificate of Occupancy – This needs to be presented to the landlord by the city building department Presented by city building department after improvements to a property have been completed.
Class A – This is a rating that is given to areas that will provide the best rental rates per square foot.
Class A, B, or C – This is used to classify the quality of a specific building. It is generally based on the rates of the rent, as prices usually indicate the quality of the property.
Class C – Areas with fewer features and amenities than others, but further in a great condition.
Common Area Maintenance (CAM) – This is an extra annual charge that is given to tenants for the property’s maintenance in common areas like bathrooms and hallways.
Common Areas – Those areas or portions of a building used by more than one Tenant (hallways, elevator lobby area, janitorial and maintenance closets/rooms, health facilities, vending rooms, restrooms, and in some cases mechanical space, loading docks and other service areas).
Contiguos Office Space – Office spaces that are next to each other (adjacent) or have a common wall area.
Core Drilling – Refers to a way of drilling a hole in the floor of a building or a ceiling, to accommodate a computer, telephone, or other electrical installation.
Demising Wall – This wall separates the area of the tenant from another’s, and in many cases this wall can be made from the floor to the roof..
Dropped Ceiling – This is a suspended roof area that is fixed to the floor’s underside, directly above them.
Effective Rate – This is the amount that the tenant will pay annually per square foot. This will remain for the entire lease term. For e.g. a five year lease with six months of free rent will provide a 10% discount rate so if the gross rate is $10.00, the effective rate will be only $9.00.
Estoppel Certificate – This is a document signed by the Tenant that confirms they are the Tenant, that their lease is legitimate, and the amount of any security deposit the Landlord is holding. It is usually required to be signed by the Tenant when an owner sells the property, or is refinancing their debt on the property.
Executive Suite – An office within an office. Usually less than 200 square feet. In addition to the space, the tenant may receive services such as secretarial, reception, copy, fax, and phone. The price is usually 2 to 4 times typical space. Great option for one or two man shows or startups. Lease terms may be as short as month to month.
Expense Stop – A dollar amount (usually stated as an amount per foot per year) that the Landlord agrees to pay for building expenses. If expenses of the building exceed this amount, then the Tenant pays the amount based on their square footage of the building.
Flex Space – This refers to an area that allows for flexibility between office and other uses. This can include laboratory, manufacturing, or warehouse.
Full Service Lease – A term used to describe a lease in which the stated rent amount being paid to the Landlord includes all the expenses of the building (ie:electricity, water, gas, janitorial, real estate taxes, maintenance, insurance, etc..). However, the name “Full Service” is really a misnomer because the tenant is usually responsible for any operating expense or tax increases above their Expense Stop (AKA Base Year). The tenants portion is called the Pass-through cost.
Gross Lease – This indicated the rental amount that includes taxes, the rent, utilities, and maintenance. This usually does not include pass-through costs.
Holding Over – A situation whereby a tenant is still occupying the space after their lease has expired. It can occur with or without the landlords consent. Often, hold over periods are pre-stated in the lease, and the tenant will incur a rent increase (i.e. 150% of current rate) until they vacate or renegotiate the lease. It causes the Tenant to agree on renewing or vacate as the cost of making no decision could be excessive.
HVAC – Heating, Ventilating and Air Conditioning.
Lease Commencement Date – The date upon which the lease commences and the obligations of the parties begins (see also “rent commencement date”).
Lessee – The Tenant
Lessor – The Landlord/Owner
Letter of Intent – A document that outlines the general terms of a proposed lease or purchase. Commonly called the LOI. It becomes the basis from which a formal lease or purchase document is written. These may or may not be binding between the parties, depending on language used. A more thorough Letter of Intent provides the parties with a more clear understanding of what they will agree to in the formal lease or purchase contract.
Letter of Representation – This refers to an agreement in writing between the broker and the tenant that states that the specific broker will be the only allowed agent to represent the tenant when acquiring office space.
Operating Costs – Expenses related to the building and property. Typically includes electricity, water, gas, janitorial, parking lot sweeping, landscape maintenance, building maintenance (except major renovations), real estate taxes, insurance, and management fees. These items should be detailed in the lease document in order to avoid confusion.
Parking Ratio – The number of parking spaces divided by the total size of the building. A ratio of 1:250 means tenants are allowed one parking space for every 250 square feet in the building. The lower the ratio, the more parking spaces there are.
Pass Throughs – This is the expenses that are associated with the lease that the landlord “passes through” to allow for certain increases in the expenses of the building.
Pro Forma – This is an estimate of the net and gross income, as well as the expenses that are expected to be incurred for a new office space.
Renewal Option – Lease language that provides the means for tenant to give landlord notice of its intent to renew (extend) the lease.
Rent Abatement – This is offered by the landlord to tenants as an inducement. It gives a reduction of the monthly lease amount and offers a benefit to tenants in that they can occupy the space without payment.
Rent Commencement Date – This is the date on which the rental amount and the lease begin.
Rentable Square Feet – This refers to the actual area in square feet when calculating the payable rent. This area will normally exceed the usable area because areas such as elevators and lobbies are also included. The difference between these two amounts is referred to as the load factor.
Subletting – The process of leasing space from a Tenant who is already obligated to a Landlord, however it does not normally release the primary tenant or their guarantors from the original lease. Most leases require Landlords consent. Subleases are great for companies seeking flexibility, shorter lease terms and low cost office space. Subleases are typically 20-50% below the current lease rate. However, factors that help determine the price of sublease space include the existing layout, the condition of the local market, the length of term remaining on the primary lease, and the overall contract rent as compared with market rents.
Subordination – This is a provision in the lease agreement that states a lesser importance or rank, and this means that it is junior to any mortgage, deed of trust, or ground lease of a property.
Tenant Improvements (TI's) – Refers to physical work done to a space to accommodate a specific tenants needs. Can include many things, such as carpet, paint, new wall partitions, new sinks, etc. Depending on negotiations, most Landlords allocate money to pay for certain standard items. Unusual items may have to be paid by the Tenant, or amortized over the lease term as additional rent. A full remodel could run between $25 and $40 per foot, depending on condition of space prior to changes.
Tenant Representation – Arrangement whereby a prospective tenant engages a real estate broker as its exclusive agent in negotiating a lease for commercial space. Also know as a “buyer's broker.”
Tenant's Market – This is when a large amount of available space goes on the market but there is not a lot of interest for it. When this happens, landlords will usually lower the lease amount to find suitable tenants for these spaces.
Triple Net Lease (NNN) – Generally refers to the requirement for the lessee to pay for its share of the property's taxes, insurance and maintenance.
Turnkey – This is an entire build-out of a premises leased by a tenant, according to the tenant’s specifications at no additional cost to the tenant.
Usable Square Feet – The square footage that the individual tenant can actually use to sit or work in. (see rentable square footage and load factor).
White Box – The interior condition of either a new or existing building or suite in which the improvements generally consist of heating/cooling with delivery systems, lighting, electrical switches and outlets, lavatories, a finished ceiling, walls that are prepped for painting, and a concrete slab floor. Also called a “vanilla box”